Chapter 4 Demand, Supply, And Market Equilibrium

A market with many sellers and buyers but with no single buyer or seller that can affect the market price.

On the demand side of a market, consumers buy products from firms. The factors include: -price of product -price of substitute goods -price of complements goods -consumer's income -consumer's taste and preferences These factors define how much of a particular product an individual consumer is willing and able to buy, which is the quantity demanded.

It is a table that shows the relationship between the price of a product and the quantity demanded, ceteris paribus, where variables are held fixed.

It is a curve that shows the relationship between the price of a good and quantity demanded by an individual consumer, ceteris paribus.

LOD states that there is negative relationship between price and quantity demanded. As the price increases and nothing else changes, you would move upward along the demand curve and the consumer would buy a smaller quantity of items. If price increases 15-20 items, the quantity demanded decreased from eight to seven. To move from an individual demand curve to the market demand curve units must be demanded from all consumers in a market at different prices. Negatively sloped curve reflects the LOD.

Supply curve is based on firm selling their products to consumers. A firm looks at different variables: -price of product -wages paid to workers -price of materials (resources) -cost of capital -state of production technology -producer's expectations about future prices -taxes that must be paid to government or subsidies (payment from government to firms to produce a product)

QS is from the factors that determine the amount of a product that firms are willing and able to sell.

It is a table that shows the relationship between the price of a product and the quantity that an individual producer is willing to sell, ceteris paribus.

LOS-positive relationship between price and quantity supplied, ceteris paribus. So as price increases, the individual would move upwards on the supply curve, increasing. To move from an individual supply curve to the market supply curve, must add the units demanded from all produces in a market at different prices. Positively sloped supply curve reflects the law of supply.

At market equilibrium, the quantity of the product demanded equals the quantity supplied at the prevailing market price. When a market reaches this equilibrium there is no pressure to change the price.

If the price is above the equilibrium price, there will be excess supply for the product since the quantity supplied exceed quantity demanded, meaning producers are willing to sell more than consumers are willing to buy. This mismatch between demand and supply will cause the price to decrease. Firms will decrease the price they charge for their limited demand and consumers will pay the lower price to get one of the many available.

A decrease in price eliminates excess supply by changing both Quantity demanded and Quantity supplied. Excess supply shrinks as the price decreases because: -market moves downwards along the demand curve -market moves downwards along the supply.

If the price is below the equilibrium price, there will be excess demand for the product (shortage of supply), since the quantity demanded exceed quantity supplied, meaning consumers are willing to buy more than producers are willing to sell. This mismatch between demand and supply will cause the price to rise. Firms will increase the price they charge for their limited supply and consumers will pay the higher price to get one of the few one available.

An increase in price eliminates excess demand by changing both Quantity demanded and Quantity Supplied. As the prince increases, the excess demand shrinks for two reasons: -market moves upward along the demand curve.

Change in Quantity Demanded (Movement): Moving along the demand curve. Change in Demand (Shift): Moving to a new demand curve.

A good for which an INcrease in income increases demand. This shifts the demand curve for normal goods to the right side. If there's a DEcrease in income, you would buy less of the Normal Good as consumers tend to purchase less of it as income decreases. This shifts the demand curve for normal goods to the left side.

A good for which an INcrease in income DEcreases demand. This shifts the demand curve for inferior goods on the left side. If there's a decrease in income you would buy more of an inferior good as consumers tend to purchase more of it as income decreases. This shifts the demand curve for inferior goods to the right side.

Two goods for which an INcrease in the price of one good increases the demand for the other good (increase in price of first good causing consumers to switch to the second good). Ex: coke and pepsi, if price of coke increases, it will increase the demand for pepsi. Decrease in price of substitute good (pizza VS tacos), tacos make pizza expensive so consumers demand less pizza.

Two goods together in one package, for a DEcrease in the price of one good increases the demand for the other good. So consumers buy more of both goods. Ex: Pizza and lemonade are complementary goods, a decrease in price of lemonade decreases the total cost of a lemonade pizza meal, increasing the demand for pizza. Increase in the price of a complementary good, such as lemonade, increases the cost of a lemonade and pizza meal, decreasing demand for pizza.

When there is an increase in the number of people means that there are more potential consumers, more individual demand curves to add up to get the market demand curve, so market demand increases.

A decrease in the number of people means that there are fewer consumers, so that market demand decreases.

Preferences/tastes that can change over time. Ex: If consumer's preferences shift in favor of pizza, the demand would increase.

When consumers' preferences shift away from a good in favor of specific good, that good's demand would increase.

If consumers think a price of a good will be higher than they initially expected next month, they may buy a larger quantity today and a smaller quantity next month. So the demand of that good today will increase.

If consumers think a price of a good will be lower than they initially expected next month, then they may buy a smaller quantity today, meaning the demand for the good will decrease.

Moving along the supply curve is "Change in Quantity Supplied (Movement). Moving to a new supply curve is "Change in Supply" (Shift).

When the cost of production decrease, the price required to generate any given quantity of good will decrease. Also a lower wage means a lower marginal cost of production, so each firm needs a lower price to cover its production so supply will increase (shift downwards). So the decrease in production costs the good production more profitable at a given price. So producers will supply more at each price. *So the supply curve shifts to right. (Ex: decrease in wages, reduction of materials cost or capital or an improvement of tech, of if government subsidizes production by paying the firm some amount for each produced unit).

If firms believe that next month's price will be lower than they had initially expected, they may try to sell more output now at this month's relatively high price, increasing the supply this month. If there a larger number of producers, it will increase the market supply.